Keep or Replace Machine: Skiles Coporation is a manufacturer of classic rocking
ID: 2487053 • Letter: K
Question
Keep or Replace Machine: Skiles Coporation is a manufacturer of classic rocking chairs. The company has been using a particular sanding and finishing machine for over 10 years and believes that it may be time to replace the machine. The company is trying to decide whether replacing the old machine is a wise economic decision. The company's controller pulled together the following information on the old machine and the new possible replacement machine. Old Machine: Original cost $445,600 Current accumulated depreciation 300,700 Estimated annual variable manufacturing costs for machine 73,900 Estimated selling price of machine 150,500 Estimated useful life (in years) 6 New Machine: Purchase cost $802,700 Estimated annual variable manufacturing costs for machine 48,750 Estimated residual value 0 Estimated useful life (in years) 6 Indicate which information below is relevant or irrelevant: Annual variable costs of old machine _________________ Selling price of old machine _________________ Matching lives _________________ Purchase price of new machine _________________ Accumulated depreciation of old machine _________________ Create a differential analysis in Excel to decide whether to keep or replace the machine.
Explanation / Answer
Though it is not directly relevant, but indirectly relevant to compute for capital gain on sale of old machine if the machine is sold today & tax thereon.
Conclusion: From the above analysis, it can be seen that net cash flow is lesser if the old machine keep, than replacement with new one. Hence replacement is not recommended.
Skiles Coporation should KEEP the old machine.
Assumptions used: (1) In the instant case cost of capital or expected rate of return is not mentioned. The rate is required to have discouting factor rate. As such I have assumed it at 10% (2) Estimated selling price of machine is considered as on today. Life of 6 years availble is aas of today. (3) Tax effect is ignored.
Annual variable costs of old machine Relevant Selling price of old machine Relevant Matching lives Relevant Purchase price of new machine Relevant Accumulated Depreciation of old machine Irrelevant*Related Questions
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